Farm Business Records & Tax Planning
Keeping good records is critical for not only paying bills on time, but it is also essential for tax planning. The following tips provide information on what records you should be gathering now to ensure that tax time goes smoothly and accurately.
Keep business and personal bank accounts separate. While this is a good practice for any business, it is critical for business entities such as an LLC. The protections you enjoy with this type of business entity is essentially removed if you mix business and personal accounts. If you are using the business checking account to pay for groceries, have the business make a payment to you, called an owner’s draw.
Keep all of your receipts. Whether you are receiving electronic receipts, paper receipts, or a mix of both-be sure you have a filing system so that you can easily find them. It may be tempting to forego the paper receipt at the checkout counter, however providing documentation for any business activity is necessary to support tax deductions. If you are selling or disposing of equipment or other property this year, be sure to obtain a receipt or other documentation so that any gain on the sale can be accurately calculated and verified. Likewise, if you are purchasing equipment or other property, proper documentation is needed when calculating depreciation expense. A taxpayer should keep receipts and other documents to support income and deductions for as long as they are needed to substantiate on a tax return. This length of time depends on the taxpayer’s situation and the type of income or deductions that may be at issue. The IRS lists the period of limitations for specific types of tax issues. https://www.irs.gov/businesses/small-businesses-self-employed/how-long-….
Gather Information Returns. Information returns are filed each year for certain payments you make to others. For example, if you have employees you are required to obtain a W-4 from them, and then file their W-2. Another common information return is the 1099. If you are paying a non-employee $600 or more for services during the year, you need to file a Form 1099 by January 31 of the following year. To properly file these information forms, a W-9 is needed from payees who meet these requirements. It is much easier to obtain the W-9 at or before payment then it is to try to track down as the January 31 deadline nears. For more information about these reporting requirements and other information returns that may apply to your business, go to https://www.irs.gov/businesses/small-businesses-self-employed/a-guide-t….
Meeting with your tax accountant well before tax time is another good practice. Do a check-in to be sure you have enough federal income tax withheld from off-farm employment. You can also use this withholding calculator https://www.irs.gov/payments/tax-withholding.
With some preparation ahead of time, end of the year tax work should go a little smoother!